Revolt of the Shareholders?

If the suit against Microsoft damages its stock price, there could be political fallout

David Frum

November 22, 1999, Vol. 5, No. 10

NO PRESIDENT SINCE Herbert Hoover has linked his fate so closely to the stock market as Bill Clinton, and unlike Hoover's bet, Clinton's has thus far paid off brilliantly. In fact, the 1990s have not been a time of unusual economic prosperity. The gross domestic product rose faster in the 1980s; personal incomes climbed at a more rapid clip in the 1950s and 1960s. But from the point of view of the nearly 80 million Americans who own securities, the 1990s have been a time of dazzling opulence, and it's on the happiness of these people that the Clinton administration's political success rests.

Remarkably enough, the contentment of those Americans who own shares in Microsoft seems hardly to have been ruffled by Judge Thomas Penfield Jackson's scathing findings of fact against their company. Microsoft's stock price dropped from $ 94 at the beginning of October to $ 89 a week after the ruling -- not good, obviously, but hardly earthshaking. Microsoft investors seem to be influenced by the memory of the Standard Oil and AT&T antitrust suits: Within a decade of the split-up order in both cases, the combined value of the successor companies had multiplied by 1,000 percent or more.

Those analogies, however, may not be apt. The Baby Bells that flourished after the bustup of the old AT&T monopoly remained regional monopolies. Long-distance communication did become a competitive market, but falling prices there triggered an enormous increase in demand -- something that seems unlikely to happen to the personal computer operating-system market. There is no upper limit on the amount human beings can talk, but how many computers can any one person own? As for Standard Oil, because of the sketchiness of accounting in those long-ago days, the company had never been accurately valued in the first place. As Ron Chernow points out in Titan, his biography of John D. Rockefeller, Standard Oil's divisions held vastly more cash than even Rockefeller himself knew. More to the point, each of the divisions was an embryonic stand-alone company: The assets of Standard Oil were divided, but not diminished. Henry Ford's Model T's fortuitously came rumbling off the assembly line at almost the very moment of the Standard breakup, and the fragments of the old kerosene monopoly quickly grew into two dozen gasoline-producing giants.

A share of today's Microsoft, by contrast, sells for a pricey 58 times earnings. The company's assets are already known and appreciated -- some might even say overappreciated -- by the shareholding public. And unlike Standard Oil, Microsoft is threatened not merely with dismemberment, but with the confiscation of its prime asset: the greatest prize of the Information Age, the operating system that runs 95 percent of the world's desktop computers. The remedy that Microsoft's opponents seem hungriest for is forced sharing of the Windows 98 source code, which would overnight turn a hugely profitable piece of software into an electronic commodity. The most relevant precedent for Microsoft's 93,850 shareholders under such a scenario might turn out to be not Standard Oil or AT&T, but Bayer and other German companies that had their U.S. patents stripped away from them in 1917. Once valuable properties were reduced overnight to worthlessness.

Of course, nobody can predict with any certainty how dire a fate awaits Microsoft because the Justice Department has not yet told the courts what remedy it is seeking. One reason for that closed-mouthedness may precisely be to allay the fears of shareholders until the last possible moment. One thing we know for sure about them: Most can afford to write a $ 1,000 check to a presidential candidate critical of Clinton's Justice Department if their danders really rise.

The Clinton administration may have deeper motives still for moving so stealthily. New Democrats benefit immensely -- both politically and in cash -- from the perception that they have abandoned the antibusiness animus of the days of Hubert Humphrey and Jimmy Carter. But while Democrats have suppressed the old itch to domineer and redistribute, they have not truly overcome it. What they no longer dare do through legislation and regulation, they have since 1995 attempted to do through the courts.

Call it the litigation arm of liberalism. Through it, cigarette advertising has effectively been abolished and tobacco taxes hiked via a negotiated deal with the industry. Some hope in this same way to impose new restrictions on guns, the Second Amendment notwithstanding. And now it is via litigatory liberalism that the Clinton administration aspires to resurrect the faded dream of industrial policy: a federal role in monitoring America's most valuable company and in managing its most strategic industry.

If the Clinton administration ever 'fessed up to this troubling ambition, it would scare the markets worse than a week of gloomy speeches by Alan Greenspan. The interesting political question is: If the broader markets ever do react, will the vast property-owning middle class that has forgiven Clinton so much forgive him this direct assault on their well-being?

David Frum is a contributing editor to THE WEEKLY STANDARD. His history of the 1970s will be published next year by Basic Books.